Home Alone: The Effects of Lone‐Insider Boards on CEO Pay,Financial Misconduct,and Firm Performance

Research summary: Corporate scandals of the previous decade have heightened attention on board independence. Indeed, boards at many large firms are now so independent that the CEO is “home alone” as the lone inside member. We build upon “pro‐insider” research within agency theory to explain how the growing trend toward lone‐insider boards affects key outcomes and how external governance forces constrain their impact. We find evidence among S&P 1500 firms that having a lone‐insider board is associated with (a) excess CEO pay and a larger CEO‐top management team pay gap, (b) increased likelihood of financial misconduct, and (c) decreased firm performance, but that stock analysts and institutional investors reduce these negative effects. The findings raise important questions about the efficacy of leaving the CEO “home alone.” Managerial summary: Following concerns that insider‐dominated boards failed to protect shareholders, there has been a push for greater board independence. This push has been so successful that the CEO is now the only insider on the boards of more than half of S&P 1500 firms. We examine whether lone‐insider boards do in fact offer strong governance or whether they enable CEOs to benefit personally. We find that lone‐insider boards pay CEOs excessively, pay CEOs a disproportionately large amount relative to other top managers, have more instances of financial misconduct, and have lower performance than boards with more than one insider. Thus, it appears that lone‐insider boards do not function as intended and firms should reconsider whether the push towards lone‐insider boards is actually in shareholders' best interests. Copyright © 2017 John Wiley & Sons, Ltd.     

A dual agency view of board compensation: the joint effects of outside director and CEO stock options on firm risk

This paper contributes to multiple agency theory by examining how the compensation schemes awarded to outside directors and the CEO jointly affect firm‐level risk taking. Using data of the S&P 1500 firms from 1997 to 2006, we find support for earlier arguments that providing the CEO, the outside directors, or both with stock options increases risk taking. More importantly, we find that compensating outside directors with stock options has significantly stronger effects than CEO stock options. Finally, contrary to what one would expect, we find that these effects are mutually substituting; that is, if both the outside directors and the CEO are provided with stock option compensation, outside directors' incentives weaken the effect of the CEO's incentives on firms' risk taking. Copyright © 2010 John Wiley & Sons, Ltd.     

When will boards influence strategy? inclination × power = strategic change

While boards of directors are usually recognized as having the potential to affect strategic change in organizations, there is considerable debate as to whether such potential is typically realized. We seek to reconcile the debate on whether boards are typically passive vs. active players in the strategy realm by developing a model that specifies when boards are likely to influence organizational strategy and whether such an influence is likely to impel vs. impede change. Specifically, we develop arguments as to when certain demographic and processual features of boards imply a greater inclination for strategic change, when these features imply a greater preference for the status quo, and how differences in such inclinations will influence strategic change. We then also propose that a board's inclination for strategic change interacts with a board's power to affect change, generating a multiplicative effect on strategic change. These ideas are tested using survey and archival data from a national sample of over 3000 hospitals. The supportive findings suggest that strategic change is significantly affected by board demography and board processes, and that these governance effects manifest themselves most strongly in situations where boards are more powerful. We discuss these findings in terms of their relevance for theories of demography, agency, and power. Copyright © 2001 John Wiley & Sons, Ltd.     

Board vigilance,director experience,and corporate outcomes

Agency-based studies of boards of directors address factors relevant to board vigilance with respect to the monitoring of senior managers. We argue that relying solely on director vigilance may be limiting because vigilance without relevant experience is unlikely to ensure board effectiveness. Our contention is that boards comprising vigilant directors, as well as directors with appropriate knowledge gained through experience, not only will be better monitors, but also more useful advisors to top managers. The focus of our study is on the effect on acquisition outcomes of the interaction of board vigilance and director experiential learning. Consistent with our expectations, the empirical findings indicate that vigilant boards rich in appropriate experience are associated with superior acquisition outcomes. Copyright © 2008 John Wiley & Sons, Ltd.     

A clash of governance logics: Foreign ownership and board monitoring

We ask whether and when shareholder‐oriented foreign owners are likely to change corporate governance logics in a stakeholder‐oriented setting by introducing shareholder‐oriented governance practices. We focus on board monitoring and claim that because the bundle of practices used in a stakeholder context does not protect shareholder‐oriented foreign owners' interests, they seek to introduce their own practices. Our results suggest that board monitoring is only activated when shareholder‐oriented foreign ownership is high and that the influence of foreign ownership is especially strong in firms without large domestic owners, with high levels of risk and poor performance. Our findings uncover the possibility of the co‐existence of different corporate governance logics within a given country, shaped by the nature and weight of foreign owners Copyright © 2014 John Wiley & Sons, Ltd.     

Activist‐impelled divestitures and shareholder value

Research Summary : This study analyzes how the divestitures that are impelled by activist investors in their campaigns against public corporations affect shareholder value. Using hand‐collected data on the activist campaigns that were launched against and the divestitures that were undertaken by Fortune 500 companies between 2007 and 2015, we find that activist‐impelled divestitures are more positively associated with immediate and longer‐term measures of shareholder value than comparable manager‐led divestitures. These performance differences persist for nearly two years after the completion of these deals. Our results empirically test the idea that firms with agency problems unlock shareholder value when they divest, and support the notion that activist investors fulfill an important external governance function. Our work also opens new research opportunities and offers practical implications as well. Managerial Summary : This study investigates how divestitures that are undertaken at the behest of activist investors affect shareholder value. We find that divestitures that were undertaken under pressure from activist investors are associated with more positive shareholder returns than comparable divestitures that were undertaken voluntarily by managers. These performance differences persist for nearly two years after the completion of these deals, alleviating concerns about the purported short‐termism of activist investors. Our findings suggest that activist investors may fulfill an important governance function by inducing managers to undertake strategies that they might not otherwise pursue, thereby unlocking shareholder value.     

BS in the boardroom: Benevolent sexism and board chair orientations

Research Summary: Though research has focused on the ascent and acceptance of female CEOs, the post‐promotion circumstances female CEOs face remain unclear. In this study, we focus on a critical post‐promotion circumstance: the board chair–CEO relationship. Drawing on the gender stereotype literature, agency theory, and stewardship theory, we posit that firms appointing a female CEO are more likely to adopt a collaboration board chair orientation and less likely to adopt a control orientation. We further predict this effect is attenuated by female board representation. Using a sample of new S&P 1500 CEOs, we find support for our predictions regarding the collaboration orientation but not the control orientation. This research provides some evidence of benevolent sexism in the boardroom, with female directors acting as a countervailing influence. Managerial Summary: Whereas the notion that females encounter a glass ceiling on their path toward CEO is well documented, the conditions female CEOs encounter after promotion are less understood. The relationship between the board chair and the CEO is one important post‐promotion condition. Board chairs can focus on monitoring and/or working together with the CEO. We suggest board chairs are more likely to work in close collaboration with female CEOs than with male CEOs. We attribute this to benevolent sexism, which explains that board chairs are more likely to collaborate with female CEOs because they view females as more conducive to, and in need of, this type of relationship. We also suggest this benevolent sexism is less prevalent when there are more females on the board.     

Boards of directors and substitution effects of alternative governance mechanisms

Research on the determinants and effects of various governance mechanisms typically assumes that these mechanisms operate independently. However, since a variety of mechanisms are used to achieve alignment of the interests of shareholders and managers, we propose that the level of a particular mechanism should be influenced by the levels of other mechanisms which simultaneously operate in the firm. We examine the substitution effects between alternative internal governance mechanisms for a sample of 81 bank holding companies in the postderegulation period. Specifically, we consider the relationship between monitoring by outside directors and the following mechanisms: monitoring by large outside shareholders, mutual monitoring by inside directors, and incentive effects of shareholdings by managers. Our results provide evidence consistent with the substitution hypothesis. We examine the implications of our findings for future research in the area of corporate governance.     

The influence of the financial press on stockholder wealth: the case of corporate governance

This study examines the impact that the publication of ratings of boards of directors by the business press has on stockholder wealth. We report findings from an event study of price reactions to the publication of Business Week's 1996 and 1997 ratings of boards of directors of U.S. corporations. As hypothesized, favorable ratings resulted in significant positive abnormal returns after controlling for market effects and confounding events, with only novel information explaining statistical variance. Contrary to expectations, unfavorable ratings also resulted in positive abnormal returns. Copyright © 2005 John Wiley & Sons, Ltd.     

Size and relatedness of units sold: An agency theory and resource-based perspective

This study tests the effects of ownership concentration, outside director equity holdings, and corporate strategy on, and the Performance implications of, the size and relatedness of units sold by parent firms. The study is based on a model that integrates agency and resource-based theories, and a sample of sell-offs by 112 Fortune 500 firms. Ownership concentration is found to be associated positively with the sale of unrelated and small units. This relationship is strengthened when outside director equity is high. In addition, the effects of corporate strategy types on the characteristics of units sold depend on ownership concentration and outside director equity. Finally, post'sell-off performance of the parent firm is associated negatively with the relatedness of the unit sold. These results suggest that the type of unit sold depends on the type of economic benefit sought by the parent firm.     

Group polarization on corporate boards: Theory and evidence on board decisions about acquisition premiums

This study investigates how a fundamental group decision‐making bias referred to as group polarization can influence boards' acquisition premium decisions. The theory suggests that when prior premium experience would lead directors on average to support a relatively high premium prior to board discussions, they will support a focal premium that is even higher after discussions; but when directors' prior premium experience would lead them on average to support a relatively low premium prior to board discussions, they will support a focal premium that is even lower after discussions. Results provided strong support for the theory. Moreover, group polarization was reduced by demographic homogeneity among directors and by minority expertise but increased by board influence. This study introduces a fundamental group decision‐making bias into governance research and explains how group processes can influence network diffusions. Copyright © 2012 John Wiley & Sons, Ltd.     

Positive and negative synergies between the CEO's and the corporate board's human and social capital: A study of biotechnology firms

This paper contributes to the corporate governance literature by developing and testing theory regarding positive and negative synergies between the CEO's and the board's human and social capital. Using a sample of 360 biotechnology firms that went public between 1995 and 2010, we demonstrate that accumulated public company board experiences of the CEO and the board have positive synergistic effects on IPO performance whereas the current board appointments have negative effects. While scientific educational backgrounds have positive synergies, industry‐specific experiences produce either positive or counterproductive effects depending on the age and profitability of the firm. Thus, our paper contributes to the corporate governance and human and social capital literatures by describing the costs and benefits of specific types and combinations of CEO and board capital. Copyright © 2013 John Wiley & Sons, Ltd.     

Outside directors' industry‐specific experience and firms' liability of newness

This study makes a contribution to the growing literature on the board's resource provision role by examining a specific type of resource provision (i.e., industry experience supplementing) and demonstrating the criticality of the liabilities of newness to this particular role. In this study, we find that among younger entrepreneurial firms, a dearth of top management industry experience is offset by the presence of outside directors with significant managerial industry experience, providing evidence of experience supplementing by outside directors. Our study highlights that the notion of experience supplementing at the upper echelons prevails in young firms as they try to alleviate the burdens of the liability of newness. Experience supplementing underscores board‐management collaboration during early years of firm development. Copyright © 2008 John Wiley & Sons, Ltd.     

Independent directors' dissent on boards: Evidence from listed companies in China

Research summary: Although opinion conformity is believed to be commonly used by corporate elites to invoke reciprocity, it is hard to study in the context of corporate boards since boards are typically “black boxes.” Focusing on publicly traded companies in China, where disclosure of dissent is mandated, we show that dissent is associated with a breakdown of the social exchange relationship within boards. Specifically, dissent is more likely to occur when the board chair who appointed the independent director has left the board, or when the board “game” is reaching its last round, defined as a 60‐day window before departure of the board chair or the director herself. Our findings lend considerable support to conceptualization of boards as a social exchange device. Managerial summary: With a novel dataset from China we ask the question of whether the social norm of reciprocity compromises independent directors' decisions. Our results lend considerable support to the hypothesis that independent directors would generally defer to top management as they feel indebted for being offered a director position and in exchange independent directors provide support. We identified two instances in which independent directors are more likely to dissent due to a breakdown of social exchange relationships: (1) when the board chair who appointed the independent director has left the board, and (2) when the board “game” was reaching its last round, that is, either the board chair or the director herself is leaving the board. © 2015 The Authors. Strategic Management Journal published by John Wiley & Sons, Ltd.     

CEO duality and firm performance: A contingency model

Several studies have addressed the CEO duality-performance relationship, with inconsistent results. This paper proposes that these inconsistencies can be resolved by integrating agency and stewardship perspectives on duality. Using data from 192 firms in 12 industries, both the direction and magnitude of the duality-performance relationship was found to vary systematically across Dess and Beard's (1984) environmental dimensions. These results provide partial support for both agency and stewardship perspectives.